A lot of people are moving their money this week, either because of outrage at the imposition of yet another fee, or due to a general realization that customers tend to get better treatment from small not-for-profit credit unions than from gigantic banking corporations.

In tangentially related news, interest rates seem to be exploring Zeno’s Paradox — how low can you go and still not reach 0%? If you have emergency fund savings (and if you do, in the current economy, I congratulate you on being both lucky and smart) you probably know the agony of infinitesmal interest.

There is a way to solve — or at least improve — both of these situations at once. Our main checking account, with a credit union, offers 4.09% APR on the first $10,000 on deposit — which is not only far above any available savings account rate, but also well above the best current 5-year CD rate. So we can have our ethics and our interest too.

High-yield checking accounts

First, for readers who may be unfamiliar with high-yield checking accounts, an overview.

Sometimes called ‘rewards checking’, high-yield accounts are your basic free checking account: no monthly service charges, no minimum balances, and free online billpay, with a default interest rate just slightly above zero. However, for each month that you perform certain activities, you qualify for a much higher interest rate on your balance for that month — up to a certain cap, usually $10k or $25k.

The standard monthly requirements are:

make 10 or 12 debit card purchases

receive at least one direct deposit

receive electronic-only statements

Some common variations and additions are:

a direct debit payment* in lieu of direct deposit

another ACH transaction in lieu of direct deposit

access your online account or billpay

make at least one payment through billpay

* (A direct debit payment is not the same thing as paying a bill through the online system; it must be initiated by the payee. So for example, if you gave your mortgage lender or your credit card or your orthodontist approval to deduct money from your checking account each month, that would be a direct debit.)

Make the grade and you get:

a high interest rate on your balance (up to the cap)

ATM fee reimbursements (usually a certain number or to a dollar limit)

Some credit unions also offer a free box of checks.

If there’s one requirement that’s likely to trip you up, it’s the minimum per-month debit card purchases. Since I log into Mint every few days anyway, it’s not too hard to check how many purchases I’ve made against the account, and adjust if necessary. But it is one more thing to keep track of, in an already long list.

On the plus side, with a buffer of several thousand dollars, you’ll never worry about overdrawing your account again.

My choice: Consumers Credit Union of Illinois

As of two months ago, our main checking account is Consumers Cooperative Credit Union, based out of the far northern suburbs of Chicago, Illinois. Joining is easy: you can do it online and the only requirement is that you deposit (and keep) $5 in a savings account. CCU offers the highest national rate available right now on deposits up to $10,000: 4.09% APY, which comes out to around $34 per month. This rate is guaranteed through June 30, 2012. (On any amount over $10k, the rate drops to 0.56%.) It has an above-average health and safety rating.

CCU’s specific monthly requirements are:

12 debit card (signatory, not PIN-based) purchases

one direct deposit or one direct debit or one online billpay transaction

electronic statements

The lack of a direct deposit requirement is unusual among rewards checking accounts, and is very useful if (like us) you work contract or freelance jobs, or are in any other situation where there may be interruptions in income. CCU’s qualification period is a calendar month, which makes it easy to keep track of whether you’ve used your card 12 times. The third-party billpay system interface is better than most; I’ve had no trouble figuring it out.

I don’t tend to use ATMs myself, but if you do it’s worth noting that CCU offers unlimited ATM fee reimbursements — no cap — if you meet the monthly requirements. There’s also a large national network of credit unions whose ATMs accept deposits for each other, in case you have a paper check or cash.

There are a couple of negatives, however. One is easily avoided if you know about it in advance, and I’ll share my workaround for the other, too.

Direct deposit fail

The first time I tried to set up a portion of my paycheck to direct deposit to CCU, it failed to go through. Turns out that the ‘account number’ I was sent in email when I opened the account is, surprisingly and inexplicably, not the same ‘account number’ that is needed for direct deposit. Neither number is provided in your online account information; the only way to get the special account number for direct deposit — or to even find out that it exists — is to contact CCU and ask.

To their credit, their email response was prompt. But the lack of upfront documentation meant it took an extra cycle for my direct deposit to kick in, which had the potential to cause all sorts of unexpected problems, from losing the high interest rate for a month to not being able to pay bills, if I hadn’t had another account I could do that from.

No ACH outbounds

This is not unique to CCU but is a problem with many small banks and credit unions; either they don’t offer ACH transfers at all or they charge a fee for them. In order to transfer money between CCU and another bank, you either have to initiate the transaction from the other end, or (reportedly, I haven’t tried this myself) route it through the online billpay, which takes longer and is more hassle.

If you keep only one bank account at a time, this won’t be a problem. However, I usually have accounts at three or four different places and shuffle money between them regularly. Personally, I solve this problem by keeping an Ally bank savings account that I use as a ‘hub’ and from which I initiate all transfers. (I’ll talk more about Ally in a future post.)

Find the best account and make the switch

None of the large national and international banks offer rewards checking accounts — only credit unions and small local banks. So if you’re looking to get away from supporting the big banks that helped torpedo the US economy, there’s no conflict.

For at least several months now CCU has had the best national interest rate, but you should check to see if rates have changed or there’s a bank or credit union local to you with a better offer. Ken at depositaccounts.com keeps the best list; click the blue filter bar and select both ‘national’ and ‘local’, then your state to see possibilities.

Note that some credit unions that appear in your state list may be limited to residents of a particular county or metropolitan region, so you should visit the web site for each one individually and check the member qualifications. (Indiana residents beware of the First State Bank of Middlebury; they charge a monthly fee against the account if you make fewer than 55 debit purchases, so the effective interest rate is much lower than claimed.)

TIP: Most rewards checking programs offer a grace period for the first, partial month, so you get the high interest rate even if you haven’t yet met all the requirements. This means that you’re better off if you open your account just after the beginning of the month (or the beginning of a qualification period, if it doesn’t run on a strict calendar month — for example, I’ve seen one start on the first Thursday of each month — so you’ll want to check).

CCU runs on a calendar month cycle, so joining this week conveniently maximizes your grace period. If you do decide to open a CCU account, let me know beforehand: we can each make an extra $50 bonus with their referral program. (I would be recommending CCU — with the aforementioned caveats — regardless, but hey, an extra fifty bucks is nice, no?)

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